Russia reminds wayward ally Belarus of its economic muscle

By Vladimir Soldatkin and Andrei Makhovsky

MOSCOW/MINSK (Reuters) – When Russia annexed Ukraine’s Crimea region, Belarussian President Alexander Lukashenko began trying to loosen his close ties with Moscow, fearing his country would be the next target.

Two years on, an abrupt drop in Russian oil supplies to the small ex-Soviet state may force Lukashenko into rethinking a policy that includes patching up relations with the West.

The Kremlin appears to be sending a message that, with the Belarus economy in recession and propped up by subsidized Russian oil and gas, Lukashenko will pay a heavy price if he wants to turn his back on his old friends in Moscow.

Ukraine regularly accused Russia of political intimidation by cutting energy supplies in the years leading to the 2014 annexation during disputes that Moscow said were commercial.

Now Belarus is experiencing something similar. Since the start of this month, Russian oil pipeline monopoly Transneft has been pumping about 40 percent less oil to Belarus than in the second quarter of this year.

Belarus relies on Russian crude for its two oil refineries. The petroleum products they produce are sold abroad, generating about a fifth of total exports, official data show.

Minsk has been trying to buy crude from other suppliers, three oil market sources told Reuters. But that will be more expensive than Russian oil which Moscow offers at a discount.

Russian energy officials say the cut in deliveries to Belarus is the result of a commercial dispute.

But others view Russia’s moves as its response to Lukashenko trying to draw closer to Western governments.

“This is a way to show the Belarusian leadership that it has to be more ‘modest’ in its relations with the West,” said Denis Melyantsov, a senior analyst with the Belarussian Institute for Strategic Studies think tank, told Reuters.

A high-level-Russian energy industry source, who spoke on condition of anonymity, said the understanding in the industry was that Lukashenko is being punished for his overtures to the West and critical comments directed at Russia.

Lukashenko, a mustachioed former collective farm manager, sounded a defiant note on Wednesday when he met the U.S. embassy’s charge d’affaires in Minsk.

He told the diplomat he wanted to normalize relations with Washington and, in a veiled reference to Russia, said no country could veto U.S.-Belarussian ties.

UKRAINE SCARE

Lukashenko, in power since 1994, has never been an easy partner for the Kremlin. He has frequently tried to play Moscow off against the West to extract the best deals for his country.

Still, Russia has regarded Belarus as its closest ally. The two countries are officially designated as united in a “union state”, though that body has no formal decision-making powers.

Lukashenko’s stance changed after Russia annexed Crimea and then gave its backing to pro-Moscow rebels fighting a separatist insurgency in eastern Ukraine.

Like Crimea and eastern Ukraine, Belarus has a large Russian-speaking community who feel affinity with Moscow.

“The Belarussian establishment and Lukashenko personally were scared by the situation with Ukraine,” said Andrei Yegorov, the director of Minsk-based think tank the Centre For European Transformation.

Lukashenko declined to recognize Crimea as part of Russia, and put on hold discussions with Moscow about the Russian military establishing an air base on Belarussian soil.

“The behavior of our eastern brother cannot fail to worry us,” Lukashenko said at a meeting with officials in Minsk in December 2014. “We are not a gigantic state, we do not have nuclear weapons, but our army is sufficiently capable to respond to any threat… Therefore we will protect our patch of land, our statehood, and our independence.”

Lukashenko launched a diplomatic push to mend ties with the European Union and United States damaged by Western allegations that he rigged elections and persecuted his political opponents.

His diplomacy paid off in February this year when the EU ended sanctions that had been in place for five years. Belarus is now in discussions with the International Monetary Fund about a $3 billion loan.

BELARUS LOOPHOLE

Lukashenko – who often brings his 11-year-old son Nikolai along to official engagements – still makes lavish public displays of Belarussian friendship towards Russia and President Vladimir Putin. Yet some Belarussian actions undermine policies the Kremlin is trying to pursue.

In 2014, Moscow banned fresh food imports from the EU in retaliation for sanctions Brussels imposed on Russia over Ukraine.

According to people involved in the Russian food trade, Belarus provides a loophole. They say Polish food is delivered to Belarus, where it is repackaged to make it look as though it is Belarussian produce and shipped to Russia.

Russia cannot stop this because border controls between the countries have been removed under a customs union agreement.

The head of a major Russian food producer said Moscow had at one point offered to help Minsk beef up its customs controls to stop the flow of food. To which Lukashenko replied: ‘What? You don’t trust us?” said the executive, who did not want to be identified as discussing private exchanges.

BATTLE OF NERVES

Russia usually supplies Belarus with more than 20 million tonnes of oil per year (400,000 barrels per day). The shipping schedule for the third quarter showed that supplies would be cut to 3.5 million tonnes.

Igor Dyomin, a spokesman for Transneft, said oil has been shipped to Belarus in accordance with the scaled-down schedule since the start of July.

Russian energy officials say the volumes have been reduced due to a row over Russian gas supplies. Minsk wants the price its pays for this reduced, though the gas is already sold at a discount.

A source close to the Belarus government doubted this explanation, saying it “comes as a surprise” to Minsk.

Ultimately, Belarus has limited room for maneuver because of its economic dependence. It is vulnerable over gas supplies as well as oil. In theory it could import gas from Poland instead, but would have to pay much more.

According to Reuters calculations, subsidies for Russian energy to Belarus amount to approximately $3 billion per year, around a third of the state budget revenues.

Belarus can ill afford to lose those subsidies; the economy contracted 4 percent in 2015 and has shrunk 3 percent since the start of this year.

Any aid from the West will come with strings attached that are likely to be unpalatable to Lukashenko.

The IMF has said the $3 billion loan that Belarus requested is conditional on liberal market reforms that Lukashenko has avoided for years.

(Additional reporting by Gleb Gorodyankin and Olga Yagova in Moscow and Dmitry Zhdannikov in LONDON; Editing by Christian Lowe and David Stamp)